Behind the supply chain curtain: 5 questions procurement needs to ask

The five questions Procurement need to ask to avoid a Nanna’s frozen berry issue

It’s a tense moment in the Emerald City. Dorothy, Tin Man, Lion and Scarecrow stand trembling before the giant visage of The Great and Powerful Oz as he thunders and roars, complete with jets of flame and billowing green smoke. Toto, Dorothy’s little black terrier, slips away unnoticed to the side of the room and pulls back a curtain to reveal that the terrible Oz is in fact a short, grey-haired gentleman frantically manipulating a control panel and speaking into a microphone.

We’ve all been guilty of accepting the facts presented to us by an organisation without pulling back the curtain to confirm them ourselves. As customers, our powers of investigation are often limited – there’s only so much you can glean from scrutinising the ingredients and country of origin labelling on a box of cereal and you’re unlikely to get very far by interrogating a uniformed teenager stacking the shelves at Woolworths or Coles. A business, however, has the opportunity to gain a great deal of visibility and control over its supply chain, but only if we are willing to do the hard work and get to know their supplier.

The recent product recall of Nanna’s frozen berries across Australia was a very public demonstration of how badly things can go wrong in the supply chain. In mid-February this year, over a dozen cases of Hepatitis A were reported by people who had consumed frozen berries sourced from China via Chile. The company immediately issued a recall but the impacts were enormous: financially, the parent company Patties Foods suffered a 12 per cent fall in share price, while $1.7 million worth of unsaleable inventory sat in their warehouses. The blow to the company’s reputation and customer trust was even more serious, with daily headlines, a class action being threatened and furious comments flooding social media. Red Cross even voiced concerns over potentially infected blood donors.

In January 2013, UK supermarkets including Tesco, Iceland and Lidl were engulfed with a similar supply chain scandal involving meat. Frozen burgers and frozen ready meals labelled as beef sourced from Romania and Poland were found to contain horse and pig meat, leading to a huge customer backlash that saw Tesco drop €360 million in market value, burger sales tumble by 41 per cent and ready meals fall by 15 per cent.

In fact a snapshot of a recent 30 day period identified 47 product recalls in Australia alone. So why did these companies make such poor sourcing decisions that left them vulnerable to risk?

Well firstly, the evaluation team may have put factors such as price and availability above equally-important factors like reputational risk. In an environment where every dollar is a prisoner to its owner, snap price decisions are made without thought to total cost, including risk. The leading procurement managers measure risk by how much it would cost the business if the worst happened, making the total cost argument even more persuasive.

Secondly, have we accepted the Oz-like visage presented by the supplier without taking the important next step of delving a little deeper? Who supplies your supplier? And, in turn, who supplies your supplier’s supplier? Investigating your supplier’s suppliers can be a courageous decision – in many cases, a company may be justifiably worried by what they might find.

So, how can businesses both large and small ensure that a frozen berry or horsemeat-type scandal doesn’t happen to them? The answer lies in taking the well-known financial services compliance mantra of “know your customer” and adapting it into “know our supplier”.

Procurement professionals need to be able to confidently trace the elements used to create their product back to its source, secure in the knowledge that risk mitigation and regular auditing is in place to protect the company’s profits and reputation.

Some typical due diligence questions might include;

How financially stable is the supplier?

What quality systems are in place to ensure the products or services supplied are of a consistent and high quality?

Who owns the supplier?

Where does the supplier obtain their goods from?

The first three are typical questions to ask, and ask them we do, but it’s the last one that we need to spend more time and to “look behind the curtain” to find out more about the supply chain. So when we do draw back the curtain what do we need to find out? A good place to start is;

Has your supplier done the same amount of due diligence with their suppliers as you have done on them

The walk free foundation http://www.walkfreefoundation.org/ discusses the obligation and opportunity for procurement and supply chain to eradicate modern slavery, a huge and noble venture. One of the ways it advocates this is to audit continuously your supply chain to ensure its slave free. This should be part and parcel of what we do and whilst we are ensuring it is slave free, we should check that the suppliers through the supply chain can actually deliver what the value that each stage brings

To summarise, here are the five vital questions that procurement should be able to answer:

Who, exactly, is the supplier?

Who are the supplier’s suppliers? And who are the supplier’s suppliers’ suppliers (and so on)?

What are the risk factors associated with using this supplier?

What systems are in place to minimise or eliminate risk?

What systems are in place to ensure the product or service is of a consistent and high quality?

So don’t wait for Toto to pull back the curtain, get to know your supplier and pull back the curtain yourself.

Unfortunately the threat of risk looms large over our profession… In 2015 we’re facing ongoing political instability, increasingly extreme weather conditions, as well as newfound threats from hackers in the digital landscape. We’ll be expanding on these at our Big ideas Summit held in London on 30 April (and digitally – on Procurious, for those wanting to join the discussion online).

We’ll be tackling all the Big Ideas that are set to shape procurement now and in the future with a goal to inspiring a new generation of business intrapreneurs – people who can think outside the box– to drive innovation and lead change in large organisations. For all of the details, to see who’s speaking and how to get involved head to www.bigideassummit.com – don’t forget to RSVP on Procurious here.